How to Refinance Your Car Loan, and When It’s Beneficial
Whether you’re a prime or non-prime customer, you might not have to wait until the end of your term to qualify for a lower interest rate on your car loan. Read on to learn about your options and see how you can save hundreds (or even thousands) of dollars with auto refinancing.
Car buyers with non-prime (or subprime) auto loans often find themselves in a tough position financially. Whether through bad credit or a credit history that hasn’t been well established, their car loans are subject to higher interest rates. The result? Higher loan payments that contribute to a financial squeeze.
If you’re in this position, you may be able to refinance your auto loan and give yourself some breathing room. But what does it look like if you choose to refinance your vehicle and how can it help?
How car loan refinancing works
Essentially, refinancing a car loan is like purchasing your vehicle all over again. There’s no price negotiation though because you’re already the car’s owner and the balance of the car loan is what you still need to pay.
When you refinance your auto loan, the lender qualifies you for credit and assesses your vehicle’s eligibility for financing. Once you’ve been approved, the lender issues a new financing contract for the amount owing and then pays out your current car loan in full.
Can I refinance my car loan?
Just like the loan you have right now, you need to qualify to refinance your auto loan. Every lender will have the same criteria, albeit with slightly different formulas. Generally, you need:
- a source of income that you can prove on paper.
- enough financial flexibility to handle payments, known as a debt-to-service ratio.
- a minimum credit score and credit history.
- a place you legally call home and have your mail sent to.
Why car loan refinancing can be beneficial
Whether you’ve purchased a car with non-prime terms or not, there may be good reasons to refinance:
1. Lower Interest Rate
Both prime and non-prime car buyers can benefit from more favourable interest rates if their credit score improves. What may seem like a small percentage decrease can save thousands of dollars over the course of several years.
2. Extending Loan Term
Refinancing may allow you to extend your loan’s financing term by years to reduce your monthly burden.
By extending the loan term, you end up spreading the borrowed principal amount over a longer time frame, but the interest paid could be more. Overall, it can give the borrower a monthly payment that they’re more comfortable with.
3. Remove Co-Signer or Add a Payee
If you’ve required a co-signer to qualify for your original car loan, you may want to remove them at some point. Or, if the vehicle was financed by someone for an unqualified buyer – like a parent financing a car for an underage teen – they’ll likely want to change the terms for financing to reflect on the right person. Refinancing your auto loan is an avenue to do so.
Should I refinance my vehicle?
Did you recently improve your credit score?
If you have a non-prime high-interest car loan because you had bad credit when you bought, refinancing might be right for you. If you’ve been able to improve your credit score since taking out the loan, you may qualify for a new interest rate! Do you know what your current credit score is? You can check to see if your credit rating has improved for free at sites like Borrowell.com.
Do you have Good or Excellent Credit?
For borrowers with prime and super-prime credit, lowered interest rates can be the catalyst to refinance your vehicle loan. Even one or two percent less in interest can save hundreds or even thousands of dollars over the term.
Has your financial situation changed recently?
If you’ve begun earning more or you’ve reduced your debt significantly, your improved debt-to-service ratio can qualify you for better financing terms.
How to rebuild your credit score
Do you find yourself in a credit situation that hasn’t improved yet? Hang in there– it takes time. But following these tips can help you rebuild your credit score quickly:
1. Pay bills on time!
Never, never, NEVER miss or skip a payment. It takes years before it comes off your credit rating. While it’s always best to pay bills in full, making the minimum payment is better than nothing at all.
2. Build credit with a personal loan or credit card
3. Seek credit sparingly
If you can avoid it, keep your outstanding debt as low as possible and minimize the number of credit applications you complete. Lenders see a red flag when someone’s credit history shows a sudden increase in activity.
How to refinance your car
If you’re ready to refinance your auto loan, it’s a straightforward process. You’ll need the same information as your initial car loan credit application, plus your current vehicle’s details. That includes:
- Current pay stub or tax return info.
- Banking information or void cheque for a pre-authorized payment agreement.
- Photo identification (so they know you are who you say you are).
- Vehicle information including year, make, model, trim, mileage, and title.